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Hello and welcome to the Deal Room, where every week we talk
specifically about all things corporate finance, from the
biggest M&A and PE deals to the strategy that drives business
decision making. We aim to bring what you learn
in the classroom to life with real world examples and
hopefully at the same time have some fun with it.
So let's dive in. Hello and welcome back to the
Deal Room. And we have a mini two-part
episode because we had lots of questions about an area called
ESG, which I'm sure all of you have heard of and probably have
some degree of knowledge about it.
But I have always on the call with me, Stephen, who is an
somewhat ESG expert and he's going to break down everything
from the history. How big is the industry?
What actually is it? Why is it so hard and
challenging to do? And in the second part, we'll
talk about things like, is ESG dead?
Or in fact, is it even more important than ever?
So, Steven, how are you first? Yeah, I'm, I'm a little bit ill
and, and I think I probably caught, I don't know whether
this is the real thing, but I've caught spring weekitis.
So this is this is probably the illness that you get after
spending time with so many highly capable, highly ambitious
young people that are that definitely want to talk to you
and want to put their best foot forward.
But yeah, we've been all over the houses this weekend and, and
so have you. What are, what are, what are
your reflections from your week with various different bold
brackets and boutiques and all of that kind of thing?
Yeah, So really excited actually because this week I got to work
with two banks that I haven't done before, so JP Morgan and
Wells Fargo. And so, yeah, it was amazing to
see, you know, spring weeks, obviously everyone's super keen
and everyone's asking lots of questions.
I almost like the fact that there's like no shackles at that
point. They're all just super buzzing,
super up for it. And yeah, just the enthusiasm
overall. So that was amazing.
But how, where, where were you? I haven't even seen you.
Yeah, no, exactly. I've been on a bit of a tour.
We were Bank of America for a few days, actually.
Shout out the Bank of America team and all of the great spring
week there. We're at Morgan Stanley, which
was a fantastic event as well. And then we spent all yesterday
at Jeffrey's. And I can say, having done this
for a few years now, my God, there's some quality out there.
I look back to when I was 19 and I think, God, I didn't even
know. People are talking about return
on invested capital, they're talking about marginal
propensity consumed. They're putting football fields
in their presentation. They're doing all of these
things that I only really learnt about when I had to when I was
at the bank. So a massive, massive shout out
to the confidence and the competence of a lot of these
people. But I think you're, you're,
you're right when, when you say the shackles are off, it's
always that analogy, always go back to the kind of sporting
concept that, you know, when you're in your mid 30s, I'm a
bit of a golfer. When you're in the mid 30s and
you're trying to win a big tournament, you have to get into
the mindset and think, you know, try to be like a 21 year old
again, try to play without fear and the shackles come off right.
You know, there's the big golf tournament at the moment and
there's a certain Northern Irishman trying to win, and he's
been trying for 11 years and the shackles are well and truly on.
But you see these young people and it's like, all right, you
guys are up for it. You don't have any of the
baggage that I have, having worn a few and seen seen a few things
in my career. So definitely embrace that.
That's the secret weapon, the energy, the enthusiasm, the
willingness to ask questions. So, yeah, yeah.
Despite getting spring week, Itis, I came away with a lot of
energy. I thought the quality was just
outstanding. So shout out to everyone that I
met. Yeah, absolutely.
I'd second that for sure. So yeah, where do you want to
start then with this ESG topic? I know there's plenty of
interest. Yeah.
And just a little bit of background as to why I wanted to
do this episode. Now, obviously we could have
gone down the typical what's going on in the news path and
there'll be plenty of podcasts filling up your feed where you
can get your dose of that. I always think it's important
just as an aside to imagine myself, you know, 30,000 foot or
maybe even as an astronaut and I don't get to check in with the
news. You know, maybe I get to check
in with the news every two weeks, right?
That really gives you a wonderful perspective on not
having to follow the everyday. Like you can follow the everyday
for entertainment purposes, but it's not necessarily that
educational. It's it's gripping.
Oh God, it's peers listening to this.
There's this controversial stuff coming out of your mouth right
now, Stephen. Just be careful.
Well, look, that's why we do different podcasts and that's
why we never meet in the office anymore.
But look, you know, there's all of this volatility and loads of
oscillations and there is, yeah, obviously there's some
interesting stuff behind it, but you, you can zoom out and
actually try and pick apart some, some big themes.
And, and one of these themes quite apart from everything
that's going on is, is ESG. And I know that students are
massively interested in building a career that has a positive
impact. And sometimes when going into
finance, you might get some pushback from your, your peers
and your friends going, God, you're going to sell your soul.
You're just in it for the money. You know, finance is evil, you
know, Wall Street protests, etcetera, etcetera.
But I just want to kind of provide students that are
looking to have an impact in their financial career with a,
with a bit of an, an overview of ESG.
And in the second part of this episode, really, really having
that discussion about, all right, is it still relevant?
Has it, has it lost its luster? Is it still important and should
you care? So that's what we're going to
do, but we're going to start right at the beginning.
Should we do some history? Yeah, I mean, I couldn't even
tell you when this concept of ESG even first came about.
So yeah, seems like a good place to start.
Well, it's one of those things that I could probably do a
number of episodes just on the history, but I'm going to try
and shorten it. This concept of, I'm going to
call it paternalistic capitalism has been around since very, very
soon after the notion of capitalism was coined, right?
This concept, whether it's the Cadbury factory in the Cadbury
town of Bournville in the late 19th century, just for a little
bit of a history lesson, Cadbury's in the UK is a
chocolate manufacturer and the owners of Cadbury's Cadbury
family, they were Quakers and they were very, very
paternalistic. They really cared about their
employees, but maybe to, you know, an extent that we wouldn't
feel happy with with our liberal 21st century brains.
But they built a whole town which was aimed at being the
perfect place to work and live. And there were no pubs.
And it was a little bit of a strange place to to work and
live. But you know what it had it's it
had its benefits. It's still around, by the way,
just outside Birmingham. So this concept of paternalistic
capitalism and cooperative capitalism has been around since
basically day dot, but we accelerate through, through the
kind of first and Second World wars and into the, well, kind of
post Second World War welfare state consumer capitalism era of
the 1950s, sixties and 70s and stopping the whistle stop tour
in the 1980s. And as a counterpoint to the
birth of ESG, the 1980s greed is good.
Oh yeah, maybe. I know it's your favorite
history, favorite era in history.
This is the this is the Friedman, Milton Friedman
doctrine. And this is from a New York
Times article actually in 1970s, so a little bit before the
deregulation of the Reagan era. So the New York Times article in
1970s was titled A Friedman doctrine.
The social responsibility of business is to increase its
profits. So that was the overarching, you
know, precursor to neoliberalism.
So Friedman argued the executive spending money on anything but
something that was going to make money is in effect spending
someone else's money for their own purposes.
So he was massively anti corporate social responsibility,
anti philanthropy as part of a businesses cause.
The social responsibility of business is to increase its
profits and to hell with everything else, right?
A single stakeholder view of the business.
And actually in the world of Gordon Gekko and in the world of
1980s Wall Street, etcetera, I always think to myself, life was
just so much more simple, right? Greed is good.
Make money. Like there is one metric that
you live and die on, and that is profits or return on investment
if you're an investor. And that was the kind of that
was the heady days of the 1980s and into the 1990s.
Now what happened to to flip that back towards a more
sustainable version of capitalism?
Well, there are a number of different forces that has led to
the birth of the SG. I'm going to pick out the two
main ones. The first with the global
financial crisis, Yeah, excuse me, global financial crisis 2000
and seven, 2008, the unbridled under regulated pursuits of
greed at the expense of normal people was that, you know, was
the headline that was that was kind of carried out led to the
Occupy Wall Street movement, etcetera, and the impending and
ever more present climate crisis.
So what happens when these two forces meet while the UN gets
involved? And actually back in 2004, they
coined the term ESG environment social governance in a paper
titled Who Cares Wins. And then it started to build a
little bit of momentum, but really, really kicked off post
financial crisis where everyone was soul searching and starting
to think to themselves, all right, like what?
What's the point in all of this? What are we doing this for?
We basically disrupted the entire financial system.
Can we be better actors and can we be better custodians of money
and can we be better businesses? We're going to Fast forward to
2015 and then we're going to take a pause and look at the
maybe the size of the industry 2015 again, the UN implemented
AI would say implemented announced the sustainable
development goals 17 targets that we need to try and achieve
as a business, political, social and investing community by 2013.
Everything from clean water to quality education and climate
action, big overarching goals. That's in the kind of low
interest rate, soul searching environment of the 20 tens.
A lot of the biggest asset managers got massively behind.
They all signed up to the principles of responsible
investing, which had and it's peak over, I think it was over
$100 trillion of assets aligned to these responsible investing
goals. Loads of investors were coming
out with ESG funds, sustainable Development goal funds.
This thing was gaining momentum and everyone wanted to be part
of it such that I remember going to conferences when I was
working in this space and it was like the back slapping capital
of the world, right? Look at us, we're making so much
money and we're doing good. How cool are we?
And it really, you know, it was pretty 2 faced, but it was a
really interesting period that kind of 2014 to 2020 era.
That's such a great summation. I think of what has probably
saved a lot of people either talking to Jack GBT or reading a
long form book. So yeah, that was a really good
kind of synopsis. So tell, maybe tell me then I'd
just like to get a bit of a feel for you mentioned a few numbers
there. I know probably those numbers
have changed in those ten years from 20/15/16.
So how big is this industry in the context to just more
traditional investing? And also I'm assuming there's
quite big geography difference between Europe, US, Asia and so
on? Yeah, it's a really good
question. And I think the question of how
big is the industry, the ESG environment, social and
governance industry, I think the reason why I'm putting it so
close to the top of this episode is because it belies a really
important point, like what is ESG?
And can you just call yourself an ESG fund without doing that
much good stuff, right? So the way that I tried to solve
this question or try to answer this question was by asking a
bunch of different chat bots, Chat GPTS, and just to see what
they came up with, right? Because if they can't find
consensus, I don't know who can. So I asked Gemini, Google's
Gemini, and they said the size of the ESG industry is 3.2
trillion ES. And by the way, this is ESG
assets under management. So $3.2 trillion of assets under
management aligned to ESG investing strategies.
OK, that's fine. So then I asked ChatGPT, a
ChatGPT. Well done for Jack.
GPT referenced its sources, Bloomberg.
It says Bloomberg Intelligent projects that ESG assets are on
track to exceed 53 trillion by 2025.
Wow, I need to get my market market making hat on here.
It's a nice little spread. That's a nice little spread,
right? 3.2 to 53 by 2025.
Well, we're already in 2025 Price Waterhouse Coopers PwC
forecasted the ESG focused institutional investments will
increase from 18.4 trillion in 2021 to 33.9 trillion in 2026.
And then what about Claude? Don't forget, Claude, based on
the latest reliable data, global ESG assets we're estimated to be
around 35 to $40 trillion. Where's grok?
Grok Is grok in this? Croc doesn't believe in ESG
unfortunately. Really enough, Croc refused to
answer my question strangely. So this again, this is such an
important point because who knows, right?
What do you define as a environment social governance
strategy? What would you put within the
ESG assets under management bucket?
Do we have a really, really tight definition and we'll go on
and talk about the different ESG strategies in a bit, or do we go
super, super broad and just go, hey, look, anything, any
investment vehicle that excludes guns or pornography, that's ESG,
right? And therefore, you've basically
got $100 trillion of AUM. Isn't there also like quite a
large incentive for companies to massively high tick this number?
And so you could basically say, well, the true numbers probably
110th of whatever the public figure is.
Yeah, it's gosh. And this and This is why, and we
would definitely get onto this probably in Part 2.
This is why ESG has been somewhat discredited, right?
So, you know, have a normal fund slap on a nice little picture of
a wind turbine on the prospectus, call it an ESG fund
and just get on with your business.
It's been, it's been a kind of the the detractor's view of ESG
and we'll get onto maybe some of the best actors and maybe some
of the more malign actors in a little bit.
But I just wanted to maybe focus quickly on the geographic split.
As you can probably imagine, it is Europe that's leading the way
and by quite some way. So I've got a note here that
says 46% of global sustainable investing assets are European,
28% US, 14% Japan, interestingly enough, 8% calendar.
So Europe is really leading the way.
And despite, and again we'll talk about this later, despite
the backlash in the US that hasn't really reverberated so
strongly here in the UK and in Europe as well.
We still believe in the concept of sustainable investing.
And we have gone so far as to actually do some really, really
good stuff in terms of regulation, guidance, best
practice. And it really is becoming a much
more still fragmented, but much more kind of mature and well
gateposted industry here here in the here in Europe, not not
necessarily in the Europe. So thinking about just quickly
from a careers perspective, if I was a early careers professional
student thinking about this area, is, is London the place to
be you would say? Yeah, it's a good question.
I mean, there's a lot of. I spent a lot of time in the
Netherlands, Netherlands. Amsterdam was huge on ESD when I
was in that space. You know, the Nordics are very,
very ESG focus and obviously if you've got big multi trillion
dollar sovereign wealth funds, then you've got a lot of
firepower to go behind it. So yes, London's not a bad
shout. You know, the the smaller hubs
around Europe are definitely worth it as well.
So yeah, you know, you're in a good place if you care about
this kind of stuff, and I don't think it's going away anytime
soon across Europe. OK.
So we've got this far and actually at this point, I still
don't even know like what actually is ESG investing in
terms of the specifics. So how does this work?
I'm assuming like any investment, there's different
ways to approach this from a strategy perspective.
So maybe we could unpack some of that.
Yeah, absolutely. So it's ESG.
I've always really struggled with this term.
I'm going to give you the kind of textbook definition
environment social corporate governance is a set of
considerations, including environmental issues, social
issues, and corporate government issues that can be considered in
investing environment social governance.
They are three drastically, dramatically different things.
It's almost, I can't even provide an appropriate analogy
to it. You know, in the world of
mainstream finance, it's like bundling together totally,
totally different things and trying to create some form of
strategy from it. You know, you can be the world's
most impactful environmental company and absolutely suck at,
you know, providing for the community and providing for your
employees. You can be the best government
company in the world, but the products that you make, you can
kill people and you get them lumped in together.
And to say that you can have an ESG score, we'll get into that
in a second. To say that you can have an ESG
score makes absolutely zero sense from my perspective.
Again, maybe to use a finance analogy to try and provide a
score that combines revenue, you know, current liabilities and
free cash flow from operations and bundle it into one single
number. It doesn't make any sense
because they're three very, very different things and they
represent very, very different elements of your business model.
So this is, This is why, you know, the whole premise of ESG
is flawed because it bundles 3 things together that shouldn't
be bundled together. Now each.
And when standing alone, the E, the S, and the G are wildly
important, extremely important for every business.
And every business should be massively, massively focused on
the environment, on social issues and governance.
But to try and lump them together, especially for very,
very different business types, it doesn't make a lot of sense.
Is there any examples you would say of a business who does do
all three well? Yeah, there are some examples.
I mean, again, not to use, not to use an overly glib example,
but Patagonia is a really, really strong example of a
company that absolutely nails it from an environmental
perspective, absolutely nails it from a social perspective.
You know, they were the first company to provide free
childcare, longer maternity leaves, paternity leave, all of
that kind of stuff. And their governance structure
is so by the book. We covered this actually a
couple of years ago on the podcast, the founder of the
founder of Patagonia, putting the business in a perpetual
trust such that no one can change the ethos of the company.
So, you know, if we were to ESG rank a company, Patagonia would
be well up there. But there were like there were,
there were companies that do one thing really well and two other
things dreadfully, but then their scores overall quite good.
And you're thinking why is that? So definitely when we move on to
talk about ESG investing strategies, definitely consider
that as you're thinking about these things.
Maybe one other question before we get to that, because I'm very
interested to know about the score, the scoring system there
and how you balance that out in a marking way.
But one thing I hear a lot when I hear ESG is also impact
investing. And I don't actually know what
the difference is, to be quite frank with you.
So. So what is impact investing as
opposed to ESG? Yeah, it's it's a really, really
good question. And again, each of these
different topics we can pick apart for for an entire episode,
but we're trying to give you good bang for your listening
buck. The way that I like to think
about it is you have this spectrum, right?
You have this investing spectrum that goes all the way at the
left hand side in your kind of mind's eye, all the way at the
left hand side. Greed is good, you make a load
of money, don't care about anything else, right?
That's just like your golden gecko all the way at the right
hand side is pure philanthropy, giving money away without any
expectation of return. Now the all of the investing
strategies that have some form of ESG or impact investing
thesis sits somewhere along the spectrum.
Right now that Harvard Business Review has said that there are 7
different types of sustainable investing strategy and they move
along the spectrum, The Gordon Gecko to philanthropy spectrum
from negative screening and I'll talk about that in a second.
On the left hand side, negative screening, positive screening,
portfolio till ESG integration, shareholder interaction,
shareholder action, shareholder Activision and then impact
investing. We're all the way to the right
hand side, very, very quick description of these different
strategies. So negative screening, all
right, normal fun, but I don't allow gambling and pornography.
Positive screening, normal fun, but I don't allow gambling and
pornography. And I am going to positively
overweight certain areas that I think are quite good, maybe
renewable energy portfolio Tilt just takes that to a kind of
slightly more systematic degree. I I'm going to overweight every
company that has an ESG rating of over X by 15% relative to the
benchmark. ESG integration is where you're
really looking deeply into the behaviors, the performance, the
carbon emissions, the employee with the employee surveys and
actually making active investment decisions based on
ESG factors as opposed to rules set.
By the way, those four I would consider in no way to be impact
investing. The concept of impact investing
is your dollar is going to have a positive impact on a
particular environmental or social theme, right?
If you're just doing positive screening or negative screening,
it's more of a kind of mental hygiene point, like you're not
having a positive or negative impact, You're just not aligned
to something that has a positive or negative or that has a
negative impact. It's a different mindset.
You're not going to change the world by not investing in
gambling. You might start changing things
when you move on to shareholder action and shareholder activism
because you are doing things like building up stakes and
companies in order to force them to decommission their coal power
plants or or invest in a update to the manufacturing facilities
or get out of slave child labor and slave labor and things like
that. So that is where you start to
get a little bit of positive impact from your investing.
And then as you move all the way to the right hand side, you get
impact investing, which is, look, I'm even willing to
consider certainly in the short term, a slight decrease in my
financial ROI in order to maximize my non financial ROI.
That is when we get into the world of impact investing.
And by the way, impact investing, it only really works
with private companies or project finance where you are
the additional dollar that makes that project happen or makes
that impact happen within a company, right?
Very hard to do impact investing in the public markets because
you just don't have enough power, right?
You just mentioned the word there, which I also hear within
this mix in this domain, which is project financing.
Just quickly what's project financing?
Yeah. So project finance is one of the
sweet spots of of the world of impact investing.
I would say if I was really, really passionate about
investing money that is going to have an additional positive
impact. We talk about the concept of
additionality a lot in the world of impact investing.
Does my dollar, does my additional dollar help create
additional impact, right? If my dollar was not there,
would that impact happen in the public markets?
If my dollar was not there, someone else would fill that
dollar because there's liquidity, right?
So in the world of impact investing, the place where your
additional dollar can go the furthest is either in start-ups
where private companies trying to do good, seeking their round
of capital to bring that breakthrough impact technology
to to to the fore or project finance, which again, imagine
trying to build a massive wind farm.
Imagine trying to build a carbon capture facility.
Imagine trying to build a huge solar farm.
From an environmental perspective, that dollar that
you're putting in is going to have an additional positive
impact in the long term on the E part of the ES and the G So
project finance, long term capital, that's where these
dollars really, really get used very, very well.
Yeah, actually what's really cool with this two-part series
is just this week I interviewed someone at UBS as part of this
series that I'm doing with women in the industry and she was in
project financing. So it'll be really nice to hear
her. She explains some of this
actually in her her day-to-day, her day-to-day job.
But with that final part of that question, actually, is that so
if I'm thinking as a young person, as a job to work, this
is really like, let's say, sparked my intrigue.
I'm like, actually, this sounds really aligned to my personal
goals as well as working in the financial industry.
Would all banks do this as a potential pocket within their
teams? Yeah, yeah.
So all banks have sustainable, all all asset managers have
sustainable in all major asset managers have sustainable
investing arms and all banks have sustainability unit.
The difficulty is and then the the hard thing from a young
person's perspective who is coming in with that kind of
young person energy that we spoke about at the beginning of
the podcast is you like you want to have an impact, right?
You want to do some good stuff and you want to stay true to the
values that you've built as you've been kind of expanding
your mind during university. And the last thing you probably
want to do is get stuck in a very in a slightly more
bureaucratic organization where you actually think we talk a lot
about sustainability. You know, we put put out glossy
brochures, but actually what we doing here, you know what, what
is, what is the point of what we're doing?
Yeah, maybe we're not investing in arms.
Maybe we are slightly overweighting some, you know,
companies that score well on an ESG rating scale.
But is that really moving, moving the needle?
So there's lots of different ways that you can navigate,
right. You know, if, if my thesis is
somewhat right that the best impact investments are, you
know, private companies, startups, project finance, and
you can find some unbelievable small asset managers in these
spaces. Then where you want to navigate
is you might want to start off doing investment banking, moving
into private equity or venture capital and then moving into
impact. Or you might want to start off
doing yeah, something like project finance within a, within
a large bank and then move to more of an A sustainability or
environment focused project finance organization.
So you don't necessarily just need to go, all right, I need to
get in the sustainability fund within this company that might
actually turn you off a little bit, sorry to say.
So yeah, there's there's, there's routes to get where you
want to be. You probably aren't going to be
able to jump straight into an amazing impact investing,
project finance or venture capital fund from day dot, but
you might get there in three or five years.
Yeah. And just to close on that, one
thing that this lady said was that she actually used to work
for Tesla and she worked specifically at the battery pack
division of Tesla. And she was like, that felt good
for all these different reasons. However, through project
financing, she gets to touch many different projects and
offer a much bigger impact to the work that she's doing rather
than a concentration within just one specific company and one
product. So yeah, it was made made a lot
of sense when she was explaining it.
Cool. Well, look.
Should we move on? Should we?
Yeah. Should we, Should we talk about,
let's bring this, this part to the close by talking about why
it's really, really hard to do. And we've, we've covered a
little bit of this before. And then obviously, we'll tee it
up for the next episode where we discuss whether ESG is indeed
dead or not. And I'm just trying to think
about, excuse me, just trying to think about why this thing is so
extraordinarily hard. And we've touched upon this
difference between the E, the S, and the GI.
Think there's so much confusion. Whenever there is multiple
different standards, multiple different acronyms, multiple
different ways of measuring, you're going to get uncertainty
and what the markets love. What do investors love?
They love certainty and they love data points.
You know, I've got a very, very strong thesis that I've probably
spoken about many times before in the podcast, which is one of
the reasons why finance is so unbelievably attractive to
people with analytical or competitive mindsets is because
you can compare your performance.
Everything is relative comparison.
I outperformed you. I get rewarded more than you as
an investor. My company's profit margin is
higher than your company's profit margin.
Therefore I should receive the most dollars.
That comparability is a thing of absolute beauty for anyone that
wants to do analysis, right? So the dollar and the global
account, international accounting standards and things
like that are prepared the way for the industry that we all
work in to absolutely flourish. Now if you don't have that, it's
really, really hard to make good defensible evidence based
comparable decisions, right? And I've just written in my
notes, I just went through a little scrawl of some of the
different frameworks that I remember from when I was doing
this thing full time. You've got the GRI.
I'm not going to explain what they are because it will take
too long. You've got the GRI, the CDP,
this, the SASB, the TCFD, the W, the WDI, ratings agencies, MSCI,
Sustainalytics, Rep Risk, ISS, Dow Jones, Bloomberg, Footsie,
Russell Video, Iris, the PRI, the CDSB, the SD, GS, like.
And they were all trying to do roughly the same thing, which is
trying to figure out how sustainable companies and funds
are. You're never going to get
anywhere as an industry. And actually with that amount of
confusion, you're going to get mistrust and you're going to get
this information. So why is it hard to do?
Because we don't really know what we're measuring standards.
The standards aren't clear enough and therefore the ability
to undermine the industry is pretty right.
So to make that really simplistic, then if you think
about say, a sovereign rating agency where it's dominated by
the big three. So this is just basically the
opposite of that where what there's too many participants
trying to mark too many different types of approaches.
There's no standard uniform way like you would with the Moody's,
Fitch, S&P. Exactly.
You know, Moody's, Fitch, S&P. What you're trying to understand
is how likely is this particular instrument to default, right?
And that is, you know, there are tried and tested methods,
quantitative and qualitative methods in order to get to a
pretty homogeneous outcome for the three different rating
agencies. One might rate an instrument AAA
and one might rate it AA Plus, but they're they're pretty
similar. I'm going to give you a couple
of examples of the ratings divergent that makes this whole
thing extremely difficult. So you've got MSCI,
Sustainalytic and S&P Global, three big ESG ratings agencies.
I'm going to take three companies here and just show you
the difference in terms of their approach to these three
different companies. So the first, first is Berkshire
Hathaway. So MSCI rates it double B, which
is sub investment grade, whereas Sustainalytics rates it very low
risk from an ESG perspective, IE it's good.
S&P Global gives it a score of 14 out of 100 on ESG I it's very
bad. Now on Tesla, MSCI rates it an A
pretty good, whereas Sustain Analytics gives it a medium risk
and S&P Global gives it a very, very low 32 out of 100, which
surprises me because Tesla is doing some quite good stuff from
an environmental perspective. The Home Depot over in the
USMSCI gives it a AA gold standard.
ES Sustainlitics gives it a low risk 12.5, which is again very
good. But then S&P Global only gives
it 37 out of 100 high risk. Why?
Because everyone's got totally different ways of approaching
this stuff. And if you're going to get this
divergent across people that pretend to be experts, are you
going to get really, really good decisions?
Are you going to get consistent decisions?
Are you going to get great outcomes?
Probably not. To close then this, this first
part, is there like a, a philosophical part of this type
of investing? And is there a case to be made
that, well, if I do have, if I'm investing and I my goal is to
make as much money as possible. If I think about myself as an
individual, if I could get to a place to satisfy all my needs
and desires, I probably would give it away and have 0
expectation of anything in return.
But until I get to that point, then I'm probably not going to
have that same degree of, of thought.
So is there some sort of like philosophical part of this that
we haven't really touched on? Yeah, that definitely is.
And and this can actually be quite well explained or
represented through the last 10 years, right.
So markets doing pretty well, you know, 2015 plus low interest
rate environment, consumer was feeling not bad, economic growth
was OK and ESG was flourishing, right, so.
There was an argument that said, look, in, in, in good times,
Absolutely. You know, let's do good old, you
know, good ESG investing, You know, let's give something back.
Let's feel really good about ourselves.
But as interest rates start ratcheting up, wait a second.
Now I kind of need to look after my own house first before I
start thinking about, you know, what might be considered to be a
strategy that doesn't make me as much money.
And I think it's really interesting to think about this
concept again, just theoretically, that in theory
it's brilliant to be a impact investor, an ESG investor.
I totally agree with the concept of companies doing good and
making money, investors thinking about the social and the
environmental issues that they're facing, all good from a
theoretical perspective. But then I start to think to
myself, all right, well, what about my pension?
You know, I want to retire and have a really, really
comfortable retirement. If someone's going to say, look,
you know, it's either you make it, you, you have a comfortable
retirement or you have a slightly less comfortable
retirement, but you're investing in some really good stuff.
Then I have to start thinking it's now a personal decision and
I might I might need to wear this for a little bit in order
to do quote UN quote the right thing.
Now, I don't want to end with that message because we're going
to go and talk about it in the second part because there is a
way of, you know, this is not a 0 sum game.
I'm very, very clear on that. It's not either you make money
or you do good. You can do both.
And we'll talk about that in the second episode.
But there certainly is this concept of like, you know,
should investors just make as much money as possible and then
regulators regulate and put the right guardrails in place so
that they can only invest in certain elements and at certain
time? And should they also tax
appropriately so that the quote UN quote trickle down comes into
play? So investors you'd, you know,
you're like thoroughbreds, right, right.
You just, you just, you just horses and you just go as fast
as you can to the finish line. But we need to make sure that
there are rails on the left and the right hand side so that you
get to the finish line. That might be a argument that a
lot of people are talking. About, yeah, I'm not sure that
would hold weight in its implementation in the Western
democracy, but OK. Well, look, right there is a
very good reason why if you don't, and I was looking on
Spotify, I think 66% of people follow, subscribe to that
Channel. So there's a big portion of you
there that don't. So as you just heard, plenty
more insights for Steven to share.
So make sure you stay tuned and we'll drop that the following
week. So thank you very much everyone
for listening. And thank you, Steven, as always
for your insights. Thanks Hun.
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